Article by Martin Hesse, Personal Finance
You’re looking for somewhere to invest. You have decided what types of collective investments you want to be in (which are appropriate to your circumstances), and must now decide on asset managers that you believe will do the best job for you.
This is not a decision to be taken lightly, and an experienced, independent financial adviser would help you enormously.
Two investment experts, Prasheen Singh, a Director and Consultant at investment consultancy RisCura, and Rory Maguire, the Managing Director of British investment consultancy Fundhouse, offer the following advice.
(For clarity, the unit trust management company is referred to as the “asset manager” and the person managing the fund the “fund manager”.)
1. Do your research
Singh says, given the wealth of information available today, you can do your own research. “Visit the asset managers’ websites and compare the fund fact sheets (or ‘minimum disclosure documents’) of the funds you’re considering. Ensure you understand the risk profile of the portfolio and the mix of asset classes.”
Also research the company, fund manager and fund on websites apart from the company’s own to get a balanced picture.
2. Find a company you can trust
Speaking at the recent Allan Gray Investment Summit, Maguire says: “Asset managers are stewards of your capital. It’s important that they understand that the money they manage is yours – there must be trust.”
There are a number of things you can check for:
The business structure must allow for a long-term view, without shareholders pressurising the company to chase short-term earnings. Privately owned companies and family- or staff-owned companies tend to do better in this respect, Maguire says.
Be cautious of large funds and companies with many funds. “Asset managers get paid on the size of assets that they manage. A large fund can constrain a manager by being less liquid and less able to access smaller companies,” he says. “So look out for asset managers with limited capacity. It’s frustrating when an asset manager closes a fund to new investment. As hard as that is, it is telling you that they are putting their profits second to your returns.”
There must be honesty and transparency. “Look for honesty, clarity, someone who admits mistakes. Avoid managers who are obfuscating and put catch-phrases and jargon in front of you to throw you off the scent,” Maguire says. Singh agrees: “Good fund managers should be able to explain their approach and how they intend to achieve their objectives in a manner that makes sense, even to a novice investor.”
Fund managers who have their own money in their funds have a higher success rate than those who don’t, Maguire says. “They are going to care more and try harder. They have to eat their own cooking.”
3. Look for good-quality people
Maguire says there must be consistency in how the fund is managed, and this comes through a stable, professional team. The key things to look for are:
Differences of opinion. “Look out for companies that may be employing similarly-minded people. You get better answers through disagreements and proper debate,” Maguire says.
The quality of the people behind the scenes.
Employer of choice. “It’s a poor indicator if a company is losing people to its competitors. You want to be attracting good people and retaining them for fairly long periods,” Maguire says.
Temperament. “Managers that add value to your portfolio are those that take different views to the market. But to do that requires the right temperament, which is a very hard thing to pinpoint. However, negative temperament is quite easy to spot. When you get defensive, ego-based answers to performance dips, be careful.”
4. The investment process must be consistent
Asset managers employ different investment styles: some focus on value (assets at below-average prices), others more on quality (how well a company is run, its profitability, and its prospects), and others on growth (young, progressive companies with the potential to grow exponentially).
Whatever the style, the company must be consistent in its investment process, which should counteract the human biases that result in bad investment decisions. This process, Maguire says, must be fairly simple to understand and “must be implemented ruthlessly”. But it also needs to allow for differences of opinion. “We look for outliers, where fund managers are sticking their necks out. And the process needs to allow for that. When you look at a fund manager’s decisions and track record, those outlying moments are important to pin down.”
5. Look at the manager’s track record
The two experts say you shouldn’t pay much attention to awards, although Singh says it may be worth looking at a fund that has consistently won awards over an extended period. Don’t forget, the person managing the fund may have changed since the fund's last award.
If you are looking at past performance, which is no guarantee of future performance, Maguire says it’s worthless looking at anything less than five-year periods. “The top South African fund managers are quite consistent for five-year performance over long periods. Any shorter period is absolutely meaningless. There is nothing predictive to be gained by looking at shorter than five years, and five years is slightly less predictive than 10,” he says.
6. Consider fees in context
All management fees should be clearly stated on the fund’s minimum disclosure document, and these may include a performance fee. Singh says the lower the risk for the fund, the lower the fee should be. For example, a cash fund will have lower fees than an equity fund because it is lower risk. “Remember that fees represent the type of product, not the quality of the product. Higher fees are not an indicator of better quality in the investment world.”
Importantly, make sure you understand the total investment cost, which may include advice fees, Singh says.
7. Be patient
It’s essential that once you have made your choice, you stick to it. “It takes time for a fund to achieve its objectives – typically between three and five years,” Singh says. “There will be periods when the fund’s strategy is out of favour, and that’s okay. You need to consider it in a long-term context and understand how and why the strategy that is out of favour today can make a comeback in a few years’ time.”